Category: Insider Trading
The SEC and DOJ have long prioritized insider trading prosecutions. Moreover, insider trading cases frequently involve parallel investigations in which the SEC and DOJ share information and coordinate efforts to collect evidence in support of civil and criminal litigation. Despite some setbacks that prosecutors have faced in recent years as insider trading case law has evolved, there is no sign that either the SEC or DOJ is backing down from vigorously enforcing the law prohibiting insider trading. We have previously blogged about the recent case law changes and their effect on civil and criminal investigations. The Bharara Task Force on Insider Trading was created in late 2018 and released its report on January 27, 2020.
Last week, the Southern District of New York dropped its prosecution of Richard Lee, a former portfolio manager at SAC Capital who, in 2013, entered a guilty plea to trading on material nonpublic information that he gained from corporate insiders. The court recently ruled that Mr. Lee’s guilty plea must be vacated to conform with the ruling in United States v. Newman, 773 F.3d 438, 450-51 (2d Cir. 2014), abrogated on other grounds by Salman v. United States, 137 S. Ct. 420 (2016). Newman held that a tippee who traded on material nonpublic information must have knowledge that the insider acted for personal benefit in disclosing the information. Thus, in 2017, Mr. Lee moved to withdraw his guilty plea on the grounds that (1) he was innocent; (2) had he known additional information, he would not have pleaded guilty; and … Read More »
Split Second Circuit Affirms Insider Trading Conviction While Rejecting Newman’s “Meaningfully Close Personal Relationship” Requirement
On August 23, 2017, the United States Court of Appeals for the Second Circuit affirmed an insider trading conviction against a portfolio manager, and in doing so, held that the “meaningfully close personal relationship” requirement set forth in the Second Circuit’s landmark decision, United States v. Newman, to infer personal benefit “is no longer good law.”
Matthew Martoma (“Martoma”) managed an investment portfolio at S.A.C. Capital Advisors, LLC (“SAC”) that focused on pharmaceutical and healthcare companies. His “conviction stem[s] from an insider trading scheme involving securities of two pharmaceutical companies, Elan Corporation, plc (“Elan”) and Wyeth, that were jointly developing an experimental drug called bapineuzumab to treat Alzheimer’s disease.” During the development of bapineuzumab, Martoma arranged for consultation visits paid by SAC with two doctors who were working on the clinical trial. One doctor was the chair of the safety monitoring … Read More »
SEC Insider Trading Update: A New Remedy, A Governmental Insider Case, & An Emboldened SEC After Salman
The Securities and Exchange Commission (SEC) recently announced two significant insider trading cases. These pronouncements serve as reminders that the new Commission under the Trump Administration, while pursuing its agenda, will continue to ensure that the financial industry is “playing by the rules.” In addition, these particular cases involve: the SEC using a remedy that it had not used before in this context; and the SEC continuing to investigate and bring cases that involve governmental “insider” information.
Regarding the SEC extending the use of a “tool” from its remedy arsenal to the insider trading area, last week the SEC entered into a settlement with a billion-dollar hedge fund and its founder, which included an undertaking for an independent compliance consultant. The novel extension of this remedy to an insider trading settlement prompted the Acting Enforcement Division Director to issue a statement. … Read More »
In Salman v. United States, 580 U.S. __ (2016), the U.S. Supreme Court upheld Bassam Salman’s conviction, giving prosecutors a win on the first insider trading case to be heard by the Court in nearly two decades. The unanimous decision, written by Justice Samuel Alito, is short and to the point. The Court reaffirmed the continued validity of Dirks v. S.E.C., 463 U.S. 646 (1983), and determined that a tipper receives a personal benefit by providing insider information to a “trading relative or friend.”
In Dirks, the Court ruled that a tippee’s liability for trading on inside information hinges on whether the tipper breached a fiduciary duty by disclosing the information. The fiduciary duty is breached when the insider will personally benefit, directly or indirectly, from his disclosure. In Salman, the Supreme Court stated that the benefit did not have to … Read More »
The Supreme Court Appears Poised to Reaffirm Dirks v. SEC and Maintain Current Insider Trading Rules
For the first time in two decades, the Supreme Court heard oral argument in a case that could change the landscape for the government’s pursuit of insider trading violations. In Salman v. United States (Dkt. No. 15-628), the Court reviewed the government’s burden of proof when it prosecutes for insider trading. Specifically, the primary issue involves whether Salman’s “tipper” had received the kind of “personal benefit” required by precedent to hold Salman criminally liable for insider trading. The United States Court of Appeals for the Ninth Circuit affirmed Salman’s conviction. However, just two years ago, the United States Court of Appeals for the Second Circuit overturned the convictions of several insider traders because the government failed to establish that the insiders had received “a potential gain of a pecuniary or similar valuable nature.” In other words, the Second Circuit rejected … Read More »
The First Circuit recently added to the increasingly ambiguous personal benefit requirement, finding that an alleged friendship and promises for free “wine, steak, and visits to a massage parlor” were enough to support a misappropriation theory of liability for insider trading. United States v. Parigian, — F.3d —, No. 15-1994, 2016 WL 3027702, at *2 (1st Cir. May 26, 2016). As highlighted in previous posts, the Second and Ninth Circuits have interpreted the personal benefit requirement differently, and in January, the Supreme Court granted certiorari to review the issue.
Parigian pleaded guilty to criminal securities fraud on the condition that he could appeal the denial of his motion to dismiss the superseding indictment for failing to allege a crime. Id. at *1. The indictment alleged that Parigian’s golfing buddy, Eric McPhail, provided nonpublic information to Parigian that McPhail had received from … Read More »
Insider-Trading Prosecutions Continue Post-Newman: USAO/SDNY and SEC Press Charges Against Ex-Barclays Director and Plumber
Perhaps looking to put Newman in the rearview mirror, the U.S. Attorney for the Southern District of New York (“USAO/SDNY”) and the Securities and Exchange Commission (“SEC”) recently brought charges against former Barclays Bank PLC director Steven McClatchey alleging that tips that he provided to a plumber, Gary Pusey, relating to at least ten impending M&A deals resulted in illicit gains of $76,000. The allegations are a distinct departure from the “misappropriation” claims pursued pre-Newman and demonstrate the pursuit of more traditional insider-trading theories reminiscent of those popularized in films such as 1987’s “Wall Street,” with the USAO/SDNY and SEC focusing on in-person meetings between Messrs. McClatchey and Pusey at a Long Island marina where cash was exchanged in a gym bag for tips on the yet-to-be-announced transactions. It will be interesting to see over the coming months whether federal authorities will … Read More »
The U.S. Supreme Court granted certiorari this week in a case that is sure to draw significant attention given its likely implications on insider trading liability. Bassam Salman filed the petition after the Ninth Circuit affirmed his insider trading conviction in United States v. Salman, 792 F.3d 1087 (9th Cir. 2015).
Salman was convicted of conspiracy and insider trading arising out of a trading scheme involving members of his extended family. During the time period at issue, Maher Kara, Salman’s future brother-in-law, had access to insider information regarding mergers and acquisitions of and by his firm’s clients that he provided to his brother, Michael Kara. Michael subsequently traded on the information. Michael then shared the information he learned from Maher with Salman. Salman also traded on the information.
Following his conviction, Salman appealed and argued that there was no evidence that he … Read More »
In a victory for the U.S. Securities and Exchange Commission (“SEC”), Judge Rakoff of the U.S. District Court for the Southern District of New York recently held that the U.S. Court of Appeals for the Second Circuit’s landmark insider trading ruling in United States v. Newman, 773 F. 3d 438 (2d Cir. 2014) did not preclude a civil enforcement action against two Euro Pacific Capital Inc. brokers (Daryl Payton and Benjamin Durant) whose criminal charges relating to the very same conduct were dismissed in January at the request of federal prosecutors.
The civil case and related criminal charges against the two brokers stem from allegations that an associate at the law firm Cravath Swaine & Moore LLP provided a former Bank of Scotland research analyst (Trent Martin) with material non-public information about a planned acquisition of SPSS Inc. by Cravath’s client … Read More »